The gold miners weren’t market pariahs earlier this year. Their leading sector benchmark, the GDX VanEck Gold Miners ETF, powered 28.4% higher in just 2.5 months between early March to mid-May. That solid young upleg was starting to win some converts, with herd sentiment shifting back towards bullish. Unfortunately that promising start was torpedoed by extreme gold-futures selling on Fed-tightening fears.
That bullishness-slaying calamity unfolded over several separate episodes, which I’ve analyzed in depth from a gold perspective. First in mid-June, a third of individual Fed officials forecast maybe two rate hikes way out into year-end 2023. That hawkish FOMC dot-plot unleashed huge gold-futures selling, crushing this metal and its miners’ stocks. But gold stocks soon started recovering from that vicious sucker punch.
Then another body blow followed in early August, after an upside surprise in monthly US jobs. That data reignited gold-futures speculators’ perennial Fed-tightening fears. They short-sold aggressively, including unleashing a rare gold-futures shorting attack that Sunday evening. So the major gold stocks per GDX again plunged to new selloff lows. While sector sentiment damage was severe, hardened contrarians remained.
Thus gold stocks recovered again into mid-September, when a nasty uppercut spawned a capitulation knockout. Heavy sustained gold-futures selling erupted again after a big beat in US retail sales, implying the Fed would have to start slowing its colossal quantitative-easing money printing sooner rather than later. Gold and especially gold stocks wilted as the Fed’s QE4-taper pre-announcement soon came to pass.
Those gold-futures cannon blasts felt like they blew gold stocks to smithereens. GDX ultimately plunged 27.1% in 4.4 months by late September, hitting levels last seen emerging from March 2020’s brutal stock panic. Gold-stock bulls were all but extinct. Of course when things feel the worst are the best times to buy low before later selling high, which is necessary to multiply wealth in the markets. That was a major bottoming.
As this GDX chart shows, gold stocks have screamed higher since in a powerful surge unlike anything seen since mid-June. Over the last several weeks, GDX has bounced hard soaring 13.7% higher at best! That blistering run included two major breakouts, above downtrend resistance and more importantly this leading gold-stock benchmark’s 50-day moving average. This massive reversal is capturing attention.
Those Fed-tightening-fear catalysts driving heavy-to-extreme gold-futures selling in recent months are shown in red. While those hyper-leveraged speculators were right in the sense that the Fed is going to soon start slowing its epic money printing, they largely exhausted their selling firepower in anticipation. Gold stocks were just bludgeoned in a preemptive QE-taper tantrum, which finally passed in late September.
That removed the withering downside pressure drowning gold miners, so like beach balls no longer held underwater they shot higher. This powerful mean reversion is just getting started, with vast room to run far higher. GDX still has yet to regain its 200-day moving average, and is a long way from recovering to pre-June-FOMC-meeting levels challenging $40. It will take big gold-stock gains to restore herd bullishness.
The gold stocks were just pummeled to deeply-undervalued levels relative to gold, making for a strong fundamental case for much-higher prices. The gold miners’ imminent Q3’21 earnings season really ought to bolster that. They are likely to report really-strong operational and financial results, leaving this sector even cheaper in price-to-earnings-ratio terms. That will underscore what incredible bargains gold stocks are.
And when really-bullish fundamentals align with really-bullish technicals and sentiment, massive gains are almost certain. Gold stocks are famous for those. This current secular bull’s first four uplegs averaged awesome 99.2% GDX gains each over 7.6 months! If this past spring’s Fed-interrupted upleg stub is considered the fifth, they still averaged excellent 85.0% gains each. Those are par for the course for gold stocks.
Their previous secular bull straddling the first decade of this century saw literally one-dozen gold-stock uplegs averaging similar 87.5% gains each over 7.8 months! While usually overlooked or ridiculed, the gold miners are a phenomenal sector to multiply wealth. The legions of weak hands who always flee in terror near capitulation bottomings lack this essential perspective. So they fail, selling low for big losses.
Some are really going to kick themselves after gold miners’ coming earnings season. Gold mining is a simple business fundamentally. These companies wrest gold from the bowels of the earth, which they generally sell at market prices. So the difference between prevailing gold prices and gold-mining costs are this sector’s profits. And those all-in sustaining costs are inversely correlated with miners’ output levels.
So these three variables of quarterly average gold prices along with gold miners’ likely average costs and production levels are sufficient to predict how their latest results should look. While the latter couple take some understanding and estimation, the first one is set in stone. In the just-completed third quarter of 2021, gold averaged $1,789 on close. That’s somewhat surprising considering how miserable gold felt.
While that heavy-to-extreme gold-futures selling on Fed-tightening fears pounded gold 9.6% lower from early June to late September, most of that happened in June. That month alone as speculators cowered in fear at maybe seeing two little quarter-point rate hikes over a couple years into the future, over 3/4ths of gold’s total recent-months selloff accrued. Gold plunged 7.0% in June alone, the lion’s share of its drop!
Of course June was the final month of Q2’21, where gold still averaged $1,814. While it’s hard to believe with herd sentiment overriding all rationality, gold actually fared really well in Q3’21. Last quarter gold just edged a trivial 0.8% lower! That’s blasphemy, right? Surely gold is doomed if the Fed is going to taper QE. The super-bearish gold and gold-stock psychology from that foolish belief really tainted perceptions.
Last quarter’s $1,789 average gold price was actually excellent, the fifth-highest on record behind some recent quarters. Q3’20 averaged $1,912, Q4’20 $1,876, Q2’21 $1,814, and Q1’21 $1,793. Q3’21 came in close to the latter couple, not far from being the third-best ever witnessed. Sequentially quarter-on-quarter in Q3’21, the average gold price merely slumped 1.4%. And goofy traders still cried the sky is falling.
For the major gold miners of GDX, $1,789 is a heck-of-a-profitable price to sell their production! That is evident relative to all-in sustaining costs, the best measure of the total expenses necessary for extracting each ounce of gold. AISCs not only include all cash costs of mining, but add on everything else that is needed to maintain and replenish gold-mining operations at current output tempos. I’ve studied them for years.
After every quarterly earnings season, I dig through the latest results from the top 25 GDX and GDXJ gold miners. Their key numbers are fed into a mammoth spreadsheet for data crunching and analysis, then I write essays summarizing the results. I’ve been doing this hard work for 21 quarters in a row now, and can’t wait to get to Q3’21 numbers. I analyzed the GDX top 25’s Q2’21 fundamentals in a mid-August essay.
Then these elite major gold miners’ all-in sustaining costs averaged $1,037 per ounce, the best proxy for gold-mining costs as an industry. That was right in line with the last four reported quarters before that, which had an average of $1,029. So odds are the upcoming Q3’21 results from the GDX gold miners will reveal similar AISCs. That would make for a very-profitable quarter despite the wailing and gnashing of teeth.
Quarterly-average gold prices of $1,789 less flat $1,037 average major-gold-miner AISCs would yield fat unit earnings of $752 per ounce! Those would prove the fourth-highest ever seen after Q3’20’s $884, Q4’20’s $838, and Q2’21’s $778. Such colossal earnings would fuel profit margins of 42%, lofty levels most industries would die for. Recent months’ heavy gold-stock selling certainly wasn’t fundamentally-righteous.
And amazingly the gold miners’ earnings will likely prove even bigger once their Q3’21 results are in and collated. I’ve been actively speculating and investing in gold stocks for over two decades now, earning fortunes. This high-flying sector with massive upleg-correction cycles to ride has been very good to me and our newsletter subscribers. As I find gold mining really interesting, I actually like reading quarterlies.
One common theme stuck out a couple months ago when I was wading through Q2’21 reports. A sizable fraction of the GDX-top-25 gold miners were forecasting considerably-higher production in Q3 and sometimes Q4. Many of these companies had full-year output guidance weighted to the back-half of 2021. Some reasons included chewing through lower-grade ores earlier on the way to higher-grade ones later.
There were also expansions coming online that would boost production at individual gold mines. So it is likely the major gold miners’ output will grow sequentially from Q2 to Q3. That should proportionally lower unit mining costs, spreading the big fixed expenses of producing gold across more ounces. Interestingly rising output in the middle of calendar years has proven a long-established phenomenon globally in this industry.
The World Gold Council publishes the best-available worldwide gold fundamental data in its outstanding quarterly Gold Demand Trends reports. I can’t wait for Q3’s installment which should be released late next week. It will reveal how gold investment demand fared last quarter in the face of that heavy gold-futures selling. For our purposes today, these GDTs include total global gold-mining production each quarter.
Going back a full decade, the sequential output growth from Q2s to Q3s has averaged an amazing 6.7%! That is massive, and the best quarter-on-quarter growth by far. Q4s to Q1s averaged 8.2% declines, Q1s to Q2s 4.4% growth, Q2s to Q3s that awesome 6.7% surge, and Q3s to Q4s stabilized there up 0.4%. Third quarters of calendar years have long proven the ones with the best gold-production growth. Why is that?
A variety of factors come into play. Mine managers get new budgets to maintain and upgrade gold-mine infrastructure as new years dawn. That contributes to downtime in Q1s as that work is done. Q1s also contain peak winter months in the northern hemisphere where most of the world’s gold mines are found. Cold temperatures slow the chemical processes used in heap leaching to recover gold from crushed ores.
Conversely Q3s have the warmest months on the top half of the planet, speeding up gold recoveries. By that time of the year the maintenance and light-expansion work is usually done, allowing production to run uninterrupted. And mine managers often choose to sequence higher-grade ores during Q3s, boosting their outputs. That’s because Q3 results are the last-reported ones before year-end bonuses are calculated.
Higher gold-stock prices heading into year-ends often increase compensation for mine managers, so they game ore grades accordingly. If they have to dig through lower-grade ores, they try to schedule them for first halves of years so better grades are available in second halves. Whatever the reasons, gold miners’ production often swells considerably in Q3s. That 6.7% Q2-to-Q3 average growth since 2010 is incredible.
That should materialize again as Q3’21 is reported over this next month or so. Exactly where GDX-top-25 gold-output growth will shake out to is a crapshoot. But to be conservative, assume sequential growth last quarter comes in just over half the global decade-long average at 3.5%. From reading the quarterlies and press releases I suspect the actual Q2-to-Q3 growth will prove higher, but 3.5% is easy to defend for a preview.
As industry all-in sustaining costs are generally inversely proportional to gold production, that implies the major gold miners’ average AISCs will also contract on the order of 3.5% quarter-on-quarter. That would leave last quarter’s estimate near $1,001 per ounce, which is still on the high side. During the last 21 quarters, the GDX-top-25 gold miners reported average AISCs over $1,000 in just 5. Those aren’t low costs.
Q3’21’s $1,789 average gold prices less $1,001 AISCs yields unit profits of $788 per ounce. That would rank as the third-highest on record after Q3’20’s $884 and Q4’20’s $838! And these massive earnings are coming with gold stocks often already trading at very-low or even dirt-cheap conventional valuations. I look at their trailing-twelve-month price-to-earnings ratios right after earning seasons in my quarterly analyses.
GDX exited Q2’21 at $33.98, well above last quarter’s average close of $32.58 as that heavy gold-futures selling ravaged gold-stock prices. This dominant gold-stock ETF left Q3’21 pounded way down to $29.47, an ugly 13.3% quarterly loss. That was ridiculously-overdone compared to gold’s own mere 0.8% Q3’21 slump, revealing how foolishly-emotional gold-stock traders as a herd have acted during recent months.
Yet at the end of Q2 the GDX-top-25 gold miners’ TTM P/Es were already the lowest I’d ever seen, with plenty trading in the teens and a fifth deep down in the single-digits! With gold-stock prices falling far in Q3, and quarterly earnings almost certain to prove very strong, sector valuations had to have fallen even lower. The gold miners’ incredibly-bullish fundamentals will amplify their gains as traders inevitably return.
There’s a good chance excellent-to-amazing quarterly reports will prove catalysts sparking big buying in individual gold-mining stocks before this latest earnings season runs its course. More important for gold-stock buying will be the fortunes of gold. It too is recovering out of gold-futures speculators’ taper-tantrum selling in recent months. So far gold’s mean reversion higher has been lagging the gold stocks’ powerful bounce.
Capital inflows into gold should really accelerate as it powers higher, since traders love chasing upside momentum. The raging inflation savaging Americans should greatly increase awareness of the critical importance of the ultimate-inflation-hedge gold for prudently diversifying stock-heavy portfolios. Even if the Fed’s QE4 taper goes according to plan, vastly more Fed money printing is still baked into the pipeline.
In coming years, gold will follow the money supply way higher. Over the last 19.6 months since March 2020’s pandemic-lockdown stock panic, this profligate Fed has ballooned its balance sheet by a terrifying 103.9% or $4,322b! That doubling of the monetary base has proportionally mushroomed the worldwide US dollar supply. And if the Fed gradually slows QE4 until the middle of next year, another $660b is still coming.
Aboveground gold supplies barely grow, rising on the order of just 1% annually through mining. Thus far more fiat dollars are available to bid up the prices on relatively-far-less ounces of gold. The more inflation worries fester with investors, the more capital they will deploy in gold. And higher gold prices will greatly increase traders’ interest in buying gold stocks, which are ultimately leveraged plays on the metal they mine.
So if you don’t have sufficient gold-stock portfolio exposure yet, there’s still time to deploy before this new upleg grows way bigger and matures. Our newsletter trading books are full of great fundamentally-superior mid-tier and junior gold miners. Their upleg gains trounce the GDX majors since they can ramp output faster off lower bases. Buying low requires adding great gold stocks before everyone else rushes in later.
The bottom line is gold miners’ imminent Q3’21 results should prove really strong. Prevailing gold prices stayed high last quarter despite those extreme gold-futures-selling bouts. That portends some of the best earnings this sector has ever seen even if production costs are stable. But gold-mining output tends to grow considerably in Q3s, which should proportionally lower unit costs. That would drive even-fatter profits.
These powerfully-bullish fundamentals are happening with gold-stock prices already beaten down to deeply-undervalued levels. So great Q3 reports could act as catalysts spurring big buying, accelerating gold stocks’ blistering mean-reversion rally higher. Gold-stock prices remain far too low relative to current gold prices and the huge profitability they drive. And gold itself is heading way higher on crazy money printing.
(By Adam Hamilton)